Your hypothesis (that there is a hole in the market for you) is still an educated guess until you get out and sell it and prove it. Don’t invest heavily until you know the demand is there and you have the customers to prove it.
You can (and you should) build out your financial projections 100 different ways but at the end of the day you can never build an accurate forecast. You can’t forecast because this is new. Its changing every day. There are thousands of variables. So much uncertainty.
Early on its about putting together the tools necessary to offer a core version of your service as cost effectively as possible. Here is my toolbox. The goal is low overhead and instant profitability.
Cast a wide net, then specialize
As your business grows you will specialize. You are focusing on the customers that are most profitable. You are reading the market signals and finding the underserved niches. You are designing your service around the 20% of customers that generate 80% of your profit. You are ignoring everyone else.
This involves casting a wide net at first and compiling data. You are tracking time and costs and complaints or refunds against revenue.
When the data points to high margins on certain aspects of your service focus on them. When the data points to headaches, refunds, and low margins on other services ignore them or cut them out all together if possible.
Keep your expenses as variable as possible
Things change quickly. So if things slow down you want to be able to cut your costs drastically on your command. That means keeping costs variable and reducing overhead. You can’t change your mind and stop paying on a 5 year office lease. You can’t change your mind and turn in your leased vehicle. You can’t change your mind and recoup your costs on the brand new equipment you financed.
There are two people you can’t get out of paying every single month: the bank and your landlord. In the early days don’t deal with either if you can help it.
When you hire employees be upfront that if things get slow hours will be cut back.
Avoid recurring costs that aren’t flexible. Don’t make long term commitments or sign long contracts. When Richard Branson started Virgin he bought his airplanes from Boeing with a clause that said he could return them if his business struck hard times.
Its about widening the gap between income and expenses
I’m not suggesting you hold on to your money and refuse to spend it. You have to spend money to increase income. Every hour you pay an employee and every piece of equipment you buy creates income. Every time you spend a dollar you are making an investment.
Its all about maximizing income and minimizing expenses. Do everything you can to widen this gap as much as possible. Remember this doesn’t have to be right this minute. Maximizing income in the long term is the focus – not tomorrow.
Ask the million dollar question for each significant investment.
Is there a way for me to spend less money on this purchase and still get the same return?
Will a $5k cargo van accomplish the same thing as $25k cargo van? Use this buying guide to find great value here.
Will a used pressure washer for $2500 accomplish the job the same way as a $5000 new one? Great, now you have $2500 to put towards marketing.
Will a new lawn mower for $12,000 make me $6,000 more dollars than the $6,000 used mower? It sure won’t. It will only increase my overhead and I’ll have to eat more depreciation if I’m forced to sell.
The math almost always points to buying equipment used.
Don’t buy into the image fallacy
You don’t need a nice car to get clients. You don’t need a $2k suit to get respect. You don’t need a shiny new mercedes sprinter van to gain trust from customers. You don’t need an office with high ceilings and a kegerator next to the ping pong table. You don’t need to entertain and spend money on fancy restaurants for your employees to be committed.
Customers are after value. They are after speed. They are after professionalism and fairness. They don’t care what your monthly payment is on the truck that shows up.
Employees are after a voice and respect. They want to make a difference. They want you to care about them and how they feel at the end of the day. They want you to listen to their opinions. They want you to set them up for success. They don’t care how swanky the office is or about the meals and entertainment you splurge on.
I’m not suggesting you spend hours or days shopping in order to save a few dollars. I’m suggesting you put effort into buying the big things right and saving money on the small things by forming good habits around your spending.
Buy your vehicles and equipment used. Avoid splurging on meals and entertainment. Avoid an expensive office by working remotely or using a co-working space month to month. If you need to unload your equipment you’ll be able to recoup a lot of your costs.
Use craigslist and ebay. Let other people eat the depreciation and buy perfectly good vehicles and equipment for pennies on the dollar.
Outsource your weaknesses
ôSomeone who practices a thousand kicks once is no where near as scary as someone who practices one kick a thousand times.ö ľ Bruce Lee
If it isn’t in your wheelhouse then don’t focus your energy or take on overhead to get it done.
Get really really good at what you do best as a business and focus your energy there. Outsource the marketing (sometimes). Outsource the billing. Outsource the payroll services. Outsource the admin work. Outsource the compliance. Outsource as many non essential business tasks as possible!
Don’t hire a full time employee to do something a freelancer can do on a month-to-month contract.
Month to month contracts are flexible. You can terminate them and take it on yourself if things get slow. If you hire an employee on the other hand that is payroll that you will need to cover on a monthly basis no matter how things are going.
There are some things you shouldn’t be in the dark about even if you outsource. As a business owner you need to be competent and knowledgable about your accounting/projections, tax planning and marketing. You need to analyze data within your business to calculate profitability of each service you offer. You need to be a great delegator and communicator to your employees. You need to be driving and managing the training programs and overseeing the customer service. You need to be organized. You need to have a positive attitude and continue to do quadrant 2 work.
Market like a guerrilla
Adwords and social media marketing can have a great ROI but a lot of new companies don’t have the budget or the ability to analyze the returns.
Get creative and get in front of your customers physically. Flyers, yard signs, sidewalk chalk and even door to door marketing can work great. Network with individuals who often recommend your services (realtors for home services for example).
Lean out your life
Yes I know I know life is meant to be enjoyed. I’m not asking you to live with a painstakingly frugal mentality forever. I love a nice restaurant just as much as the next person.
If you are exactly where you want to be in life this post isn’t for you. If you have already designed your life exactly how you want it then by all means do what you want to do with your personal finances.
But if you are working towards a future goal and building a business its time to lean out your personal life.
There is no ROI on lifestyle expenses. There is no future profit on the nice car. There is no future profit on the expensive house (besides a little bit of appreciation to offset massive amounts of debt service). There is no return you get on the expensive dinner. Its all overhead. Its all money that is gone that you will never see again.
You are tied to your job right now because of the money you need to finance your lifestyle. If you are serious about leaving your job as soon as possible its time to get serious.
Remember this is only in the near term. You are delaying gratification now so you can build the life you want and buck your 9-5 and do what you want to do on a daily basis.
Every dollar invested in your business will become 2 or 3 dollars in the near future. Every dollar invested in everything else will either be gone or worth pennies. Free up your capital so it can work for you.
So you have a business now. Some momentum. Some profit. Don’t fall victim to lifestyle creep. As your income rises keep your expenses steady so you have more funds to invest when opportunities present themselves. Don’t finance the new Audi after a few profitable months. Don’t buy the house with the extra bedroom you don’t need.
When you see an opportunity or things get hard it will put a ton of pressure on your business when the money is flying out the window in your personal life.
If you stay lean a few amazing things will happen
You will avoid unnecessary financial stress. Your quality of life will improve drastically. You will have the peace of mind that comes with being able to ride out tough times or uncertainty and limit losses if they occur.
If you aren’t strapped for cash you aren’t forced to milk early customers and turn a profit right away. You can play the marshmallow game and delay profits and gratification. You can learn a lot and customers won’t be as harsh on early mistakes and growing pains.
The longer you can go without pulling big money out of the business the longer you can build a following and grow your volume.
You can invest in making speed your competitive advantage. You can frontload your hiring to provide on demand services and charge a higher price.
You can make more investments in growth and marketing. When you find a marketing channel that turns $1 into $1.50 you can double up your marketing spend. Instead of having that money tied up in a depreciating vehicle or a big office you can have it ready to invest and ignite your growth.
You can focus on adding value first. You can get out and offer a discounted service or a free service to new customers. You can get a following. You can learn more about offering your service. You can build a brand. You can get reviews on the most important online channels.
Offering a free first time service in subscription or recurring business models like lawn care, cleaning, mosquito treatments and others is an investment.
You can track your data and record how much each free service is costing you. Then you can track how many of your free services end up converting into a paying customer in the future. It is an investment and you will be able to easily calculate your return.
Risk is managed and reduced drastically
Business is all about risk and reward. Nothing is risk free. You are always risking something. Maybe time. Maybe money. Often both.
Running a lean business drastically reduces your risk. It makes your business more likely to survive. It limits financial losses if your business fails.
When the next recession happens and 50% of the businesses in your sector fail you will survive. You will be able to ride out the storm. You’ll be poised and ready to ride the next boom and capitalize on the opportunity.
When things change – your business must be able to change
If you are lean and your expenses are flexible you are ready to change course at the drop of a hat. You are ready and able to chase opportunities. You are able to specialize and turn down more customers than you accept.
Entrepreneurship is fluid. Nothing is certain. New competitors arise. Technology changes. Government regulation changes.
Your path will change. Stay lean so you can capitalize and build a healthy company that can survive the journey. Be frugal where it doesn’t matter so you can invest where it does.
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